LTA threshold / charge with multiple pension funds

drjohn67

Good Morning

I took my NHS pension last year using 67% of LTA. 
4 smaller funds are due to be claimed the next month. The forecasts for 2 arrived late and are higher than anticipated. Additional IFA advice is scheduled in the next couple of weeks though I need to submit the forms ahead of then in order to collect all 4 on the same day.

The total of the TFLS will remain within the LTA. However, the taxable element of the funds will take me beyond the LTA. If the pensions are taken in sequence then some of the funds will be beyond the LTA (including the associated TFLS). Pending that advice wondered if others had been through similar.

Does HRMC allow synchronous consideration for funds collected on the same day?
Could this then allow the TFLS to be truly tax free and the LTA charges to apply to the taxable element.

I don’t want to cheat on tax just merely to avoid a silly mistake with sequencing that leads to me paying more than I need.

Marcon

drjohn67 said:

Good Morning

I took my NHS pension last year using 67% of LTA. 
4 smaller funds are due to be claimed the next month. The forecasts for 2 arrived late and are higher than anticipated. Additional IFA advice is scheduled in the next couple of weeks though I need to submit the forms ahead of then in order to collect all 4 on the same day.

The total of the TFLS will remain within the LTA. However, the taxable element of the funds will take me beyond the LTA. If the pensions are taken in sequence then some of the funds will be beyond the LTA (including the associated TFLS). Pending that advice wondered if others had been through similar.

Does HRMC allow synchronous consideration for funds collected on the same day?
Could this then allow the TFLS to be truly tax free and the LTA charges to apply to the taxable element.

I don’t want to cheat on tax just merely to avoid a silly mistake with sequencing that leads to me paying more than I need.

Are these all DB pensions, or a mix of DB and DC? Any reason why you couldn't take them in sequence rather than all on the same day?

Pat38493

Are the 4 smaller funds DB or DC funds?  As you say you were waiting for estimates, this implies that they are all DB pots and you are wanting / planning to take lump sums out of them?

drjohn67

2 other Govt pensions and 2 private pension funds.

However each has a 25% TFLS component.

My concern was that the TFLS would seem to be taxed at 0% if within the LTA though 55% if claimed after the LTA threshold.

Whereas the pension income or drawdowns would be taxed at 40% if within the LTA and 65% if claimed after the LTA threshold.

This would seem to be a 30% difference on a significant amount that could perhaps still qualify as a TFLS.

Pat38493

And even the 2 private pension funds are pensions which provide a guaranteed income on top of the TFLS i.e. Defined Benefit pensions?

You probably need to either research more on how the LTA works and/or ask your IFA.  However one opening comment would be that the LTA is normally only levied on amounts in excess of the LTA, so you would not for example pay LTA tax on an entire lump sum unless the entire amount was already in excess of the LTA.

If these are all defined benefit pensions, the LTA will be calculated for the entire pension at the time you take the benefit based on 20x the annual income plus the lump sum (but you probably knew that already from what you have written).  At the time the LTA is exceeded, I think what most commonly happens is that your pension income is then reduced to take account of any LTA due.

Do you have option to defer any of these pensions in return for larger benefits - this would be one way to sequence them?

Also as an aside - are the lump sums obligatory?  There is often discussion on this forum that taking the lump sum on this type of pension might not be the best decision unless you actually need the money.  However if it’s an NHS type pension I think the lump sum is mandatory anyway.

If you are taking all 4 on the same day, I don’t know how any LTA would be apportioned - you would need an IFA on that or perhaps a better expert will be along shortly here.

drjohn67

Thanks for comments so far. 

Some of the lump sum in the DB is mandatory though I am opting for an increased TFLS to take me to the maximum. Over 20years the TFLS is 40% less than the pension that I would receive. However, that would have been taxed at 40%. 

The difference results in a reduction in overall value wrt LTA.

It also drops me in to 25% tax band and qualifies me for child credits for a few years.

If I hold on to the private pension funds the growth will be taxed at 65% whereas if I claim now then growth will be taxed at the relevant tax band that applies when it is collected. This is appealing as I intended to invest those 2 pots of money for my children to use for university or housing - pending IFA advice in a few weeks.

Pat38493

drjohn67 said:

Thanks for comments so far. 

Some of the lump sum in the DB is mandatory though I am opting for an increased TFLS to take me to the maximum. Over 20years the TFLS is 40% less than the pension that I would receive. However, that would have been taxed at 40%. 

The difference results in a reduction in overall value wrt LTA.

It also drops me in to 25% tax band and qualifies me for child credits for a few years.

If I hold on to the private pension funds the growth will be taxed at 65% whereas if I claim now then growth will be taxed at the relevant tax band that applies when it is collected. This is appealing as I intended to invest those 2 pots of money for my children to use for university or housing - pending IFA advice in a few weeks.

40% tax going down to 25% (do you mean 20%)  tax - are you still working as well, or are you saying the higher income instead of the lump sum would all be taxed at 40%?

Is this plan coming from previous advice from your IFA after a detailed review of your financial situation or is this the first time you've engaged an IFA?

 It might just be me (long week) but why are you saying the growth on the private pensions will be taxed at 65%?  That comment indicates that these pensions are DC (defined contribution) pensions i.e. a pot of money?  If that's the case, if you take the cash 25% out now, thereby crystallizing the current pot amount, you won't be taxed on any growth of the amount that's still in the pension wrapper until you are 75 (or you take out further uncrystallised funds).   

If these are DC pots it may be that you are better to leave them in place until you actually want to access the money for uni fees or whatever.  This may also come down partly to whether you want to pay any LTA tax due immediately out of lump sums on DC pots, or have your pensions reduced accordingly.  You won't pay any LTA on those until you do something with them (or reach age 75).

If you take only the DB pensions and leave the private ones in place (uncrystalized) (even if only for some months), will you still exceed the LTA just by taking the 2 government ones?

In any case it sounds like you have quite a complicated LTA management issue and you would definitely benefit from IFA advice.

Edit: I am making some assumptions in what I am saying (e.g. you have not provided much detail about the 2 private pots) so it may end up not being valid based on further details.

Albermarle

As above, there is no such thing as a 'private pension' but we have to assume you mean DC pots, as it not possible to have a private DB pension.
As above not sure where this 65% figure comes from.
If you are above LTA, and take income from the pot then you pay a 25% charge and then income tax on the remaining 75%. So a 20% taxpayer would end up paying 40% of the original sum and a higher rate taxpayer 55%

It also drops me in to 25% tax band and qualifies me for child credits for a few years.
There is no 25% tax band, only 20%-40% - 45%

Knowing a little about both DB and DC pensions, I would think it would be an administrative miracle for them all to pay out on the same day. Some DB administrators in particular only work at snails pace, and can be very unreliable at meeting deadlines.

drjohn67

Hello

Apologies typo. I meant 20% rather than 25% - 25% might have been the lower rate when I last qualified for that years ago. (Definitely not whining about that. Parents were low earners so I know have been fortunate. )

Yes the 2 DB will take me over the LTA. 

Agreed complex. 

The private pots add up to 200k so I was hoping to be able to pick out the TFLS for preferential sequencing and then paying any LTA charges on the monthly pension and remaining 75% of the DC pot.

Timescale after the IFA meeting (until the DB come in to payment )is very tight so I have contacted him for some pre-meeting advice to see if the DC pots just need to be left a little longer.

Pat38493

drjohn67 said:

Hello

Apologies typo. I meant 20% rather than 25% - 25% might have been the lower rate when I last qualified for that years ago. (Definitely not whining about that. Parents were low earners so I know have been fortunate. )

Yes the 2 DB will take me over the LTA. 

Agreed complex. 

The private pots add up to 200k so I was hoping to be able to pick out the TFLS for preferential sequencing and then paying any LTA charges on the monthly pension and remaining 75% of the DC pot.

Timescale after the IFA meeting (until the DB come in to payment )is very tight so I have contacted him for some pre-meeting advice to see if the DC pots just need to be left a little longer.

Further point is that by taking the tax free 25% cash from your two pots, you "crystalize" the corresponding 100%.  For example your take 50K tax free you will be crystalizing 200K.  It's the amount crystalized that is tested for LTA, so taking the cash out of those pots does not defer the LTA test on those two in the way that you might think.

Further to Albermarle's point, I also wouldn't be surprised if these LTA issues delays the process as it will take some sorting out.  If you do want to take the DC pots early though, you might be lucky - probably putting those into payment takes less time than the DB ones (depending on the provider).  Putting a DB pension into payment in only one month from now is optimistic - from what I remember from my wife's pension, NHS requires 3 months notice to put your pension into payment. 

I think I read somewhere that in these type of situations, your IFA will want to know the LTA commutation rates for your DB pensions so they can advise as well.

I guess one other point not clear is when you say "due to be claimed next month" in your first post, what do you mean?  Do you mean that the 2 DB pensions are reaching normal retirement age?  

drjohn67

Private pension was how it was sold to us 30 years ago and interestingly the term still used on gov.uk - I think it referred to pensions that are not managed by the state. It was a DC type arranged by me rather than a workplace one. Left it dormant after the LTA dropped.

Thanks for explaining the 25% and 40% which had previously been described to me as 25+40% i.e. 65%. Your explanation was much clearer.

I suppose the specific detail that I hope will come through is, what happens to the TFLS for the DC if the pension is over the LTA?
It sounds like the DC pot of money is reduced by 25% at time of crystallisation. 

(Hopefully, I still get a TFLS OF 25% of the residual DC pot and then pay income tax on anything beyond that. That seems like one of the key questions to resolve with the IFA.)

P.s. It will be a second IFA meeting this time with a specialist LTA expert that he has recruited in.

Your advice has been very much appreciated because the synchronous pension claims seemed unlikely to be successful.